A significant component of retirement-readiness is protecting participants from themselves. Many recent studies have shown that major obstacles to employee attainment of retirement-readiness include the loss of account balances due to loan defaults and hardship withdrawals. This account leakage can be reduced by a well-managed participant loan program. A state-of-the-art loan program has the following three characteristics:

1. Loans are limited to safe-harbor hardship withdrawal criteria. Plan loans are horrible investments. The cost is high (due to double taxation), interest payments are not deductible and penalties may apply if the loan is defaulted. Rather than allowing employees to borrow to buy a boat, snowmobile or deluxe vacation, many employers have chosen to limit participant loans to hardship withdrawal criteria. This allows employers to qualify (and essentially limit) plan loans using well-accepted legal criteria. Valid hardship withdrawal requests are for funds to: prevent eviction or foreclosure; pay medical or funeral expenses; purchase or repair a primary residence; and pay educational tuition.

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